Pressing Risk Issues

The mortgage servicing market is engaged in a multidimensional effort to prioritize pressing issues of scale on both sides of the foreclosure transaction in loan modifications and real estate-owned property management.

Everyone is carefully monitoring changes in home prices, which are not "the crystal ball" that predicts the future but nonetheless is accepted as a meaningful indicator of the mortgage market health.

Mortgage servicers of today can no longer sit and watch mortgage horror movies because suddenly they are co-starring there with the borrower. Meanwhile, some findings are hopeful for the future.

The Clear Capital July Home Data Index Market Report shows that for the first time since 2006, rolling quarter-over-quarter price returns for the nation were positive at 1.7%, driven primarily by seasonal sales.

"We are encouraged to see the first quarterly national appreciation in three years," says Clear Capital president, Kevin Marshall.

Costa Mesa, Calif.-based independent real estate research firm Hanley Wood Market Intelligence also reported that both new and existing home prices posted gains in May. Existing-home sales continued to rebound while new-home sales eased slightly, HWMI said, noting that improvements in both inventory and pricing for the new and existing home markets in May "are positive signs for a housing recovery."

HWMI findings about pending home sales in May indicate some stabilization in the housing market driven by higher affordability and the government's homebuyer tax credit. Although the HWMI pending home sales index only increased 0.1% from an upwardly revised April figure, it was the fourth straight month that the index has increased.

Also according to HWMI, overall the economy gives reason for a "faltering optimism" and for obvious reasons. Rising unemployment continues to show its effects on consumers, HWMI reports, referring to American Bankers Association data showing that loan delinquencies reached record levels in the first quarter.

It warns that a rise in non-housing delinquency categories "sets off another concern that other forms of consumer debt unrelated to housing may be the next wall to crumble if the economy does not recover soon."

How well are servicers equipped to screen debt related loan risk?

HWMI data show that in June continued job losses pushed the nation's unemployment rate up to 9.5%, the highest it has been since August 1983. In the final quarter of last year, the economy contracted 5.5% during the first quarter compared to 5.7% contraction in preliminary estimates and a 6.1% drop in advance estimates. "This was the first time since 1975 that the economy has contracted for three consecutive quarters," HWMI said.

Other studies and surveys are trying to get the pulse of the borrower. Financial institutions and mortgage servicers in particular need the feedback.

To some it is a positive sign that borrowers who have debt do not stress much over it. According to a recent Associated Press/GFK survey, 54% of the participants say they do not feel very much stress or not at all because of debt, up to 47% worry hardly ever or not at all about debt, and 68% think debt will be either a small problem or no problem at all in the next five years. The survey notes that at least in part that optimism comes from the fact that 48% of the surveyed think the country is headed in the right direction compared to only 18% in 2008.

This is good news from the stress perspective. Not so much so if those who are homeowners are in denial of the fact that unpaid debt represents a major risk to them and their lender/servicer. Borrowers are now the focal point. In other words, despite combined efforts by the federal government and the industry new foreclosure risk remains as high as ever.

Maybe the good news is elsewhere. Such risks have pushed for innovative solutions that provide hopeful alternatives for borrowers and their servicers.

For example, Equifax Inc. of Atlanta is offering what the credit rating company calls its debt freedom product, Debt Wise Equifax. It was designed to help subscribers to the program create and start paying off their debt through an online debt payment plan that takes about 10 minutes to set up, Equifax said. For less than 50 cents a day, it provides Fast Play Plan Wizard, an automated feature that helps select what debt to include in a plan, apply a debt stacking strategy so that the user can pay faster "without paying more in monthly payments than they already do." And since it is done through Equifax they can better protect their information by avoiding the use of a third party.

"On average, households with credit-active consumers owe 24% of their annual income in debt, but are only spending 13% of their disposable income repaying debt," said Steve Ely, president of Equifax Personal Information Solutions, upon the release of the product. "At that rate consumers are not even treading water, they're drowning in debt. That is why it is so important that consumers have a game plan for getting out of debt, a plan that they can actually stick to."

If the mortgage industry comes out of this crisis with lessons learned and better equipped to face another crisis, it is in the right path indeed.